Monday, September 13, 2010

Part Two - The Peoples Republic Discovers the "New Opium"

The second of a three part posting concerning the current dilemma in the U.S. economy - "cheap labor."

Where did it come from?  What can we do about it now?

 (For Part One, link here)

We left off the first part of this series of postings with the rapprochement between the United States and the Communist Chinese.  The remarkable foreign relations accomplishment was orchestrated largely by President Nixon's Secretary of State, Henry Kissinger.

Kissinger was a notably effective diplomat for two important reasons.  Although an unrepentant neo-con of the day, what ideology he did personally host seemed to be easily dismissed when pragmatic opportunities of the moment emerged.  We saw this unfold visibly both in his "Chinese project" and, later,  in the U.S. withdrawal from the disastrous Viet Nam war.  The two events, it turns out, may have been more closely associated than many of us suspect.

Chairman Mao and President Richard Nixon meet, in 1972.

One of the many "failed management features" constantly lamented during the Viet Nam war had to do with the bridge that separated Hekou in China from Lao Cai in  North Vietnam.  The open complaint during the conflict was that this bridge was never bombed.  Further, at least to the limit of MeanMesa's understanding of the situation, the resupply shipments crossing the river were, at least at first, originating in both the Peoples Republic and the Soviet Union.

Diplomatically provocative tactics had been employed at other targets during the conflict.  For example, after an exhaustive warning to our allies, the harbor at Haiphong, North Viet Nam was ineffectively mined.  The effort did little to diminish the number of supply ships visiting the North from European sources on both sides of the Warsaw Line, but it served to mollify some of the most hawkish U.S. political factions.

The "Big Picture" of the U.S. Economy in  1972

1972, the year that U.S. President Nixon went to China, is a good landmark for the following geopolitical comparisons.

Until the 1980's election of Ronald Reagan, the U.S. economy had been making good progress.  Middle class wages had been increasing at a steady rate for three decades.  Home ownership was an attainable goal for most Americans.  The federal budget deficit was comfortably below the current, catastrophic percentage of GDP.

The "cash flow" within the U.S. was clicking along pretty much according to the developing "blueprint" of what a rational democracy might expect.  The well-to-do middle class was funnelling immense tax resources into the federal treasury, and the income tax rates for the wealthiest Americans was well over 60% of their incomes.

The high marginal tax rates invited American millionaires and billionaires to reinvest their earnings in their companies rather than suffer the tax rates for profits simply taken from their enterprises. This fostered a significant period of innovation, advancing product markets, highly efficient manufacturing techniques  and a healthy export market.  The concentration of wealth in the domestic U.S. made the country a global resource for investments and development.

The U.S. was the "money lender" for the world.

Perhaps most important to the point of this posting, the equity held by  middle class Americans was deep and rich.  They owned stocks and bonds, real estate, nice cars and enjoyed educational opportunities which were the envy of the rest of the world.  The "wealth" of the nation was deep seated and durable.  There were retirement accounts, pensions and substantial individual savings. Organized labor flourished, constantly pressing wages and work conditions upward for both the union workers and all others.  The roads were good, public buildings had roofs which didn't leak and a single wage earner could afford a house  for a family and still pay for his children's college.

The stand-off of the Cold War with the Soviet Union was costing a tremendous but manageable  amount of the national budget.  However, Eisenhower's famous warning about the "military industrial complex" seemed to be materializing, steaming along on its own, gradually allocating more and more of industrial American output into weapons for an eager world market.

Although far below the U.S., the quality of life in the Soviet Union was still way ahead of that in the Peoples Republic.  The Communist economies in both states had responded with a "heavy hand" against the previous Czarist (USSR) and Colonial (PRC) conditions which had grown so onerous prior to each one's revolutionary changes.  From the comfort of the United States, it seemed that these aggressive actions were  unworkable, but that view was not based on actually  directly experiencing anything even similar to the desperation imposed by either previous system.

Just as the Chinese developed an obsession to never fall back into the opium colonialism, the USSR had a similar determination to never again play host to the largesse of an absolute monarch.  These obsessions about political and economic systems in the Communist world easily vilified the international economic expansionism developing in the U.S.

The U.S. Ponders the Choices Concerning China

Here, MeanMesa must simply speculate.  Somewhere along the line, a new direction arose in the U.S. policy concerning China.

The prospect of facing two Cold War adversaries at the same time was costly beyond even the formidable resources of the U.S.  The gravity of the way things had developed in U.S.-Soviet relations (MAD - "Mutual Assured Destruction") was largely considered a tragic mistake, and a similar regimen of  ideologically confronting China could easily aggravate matters by duplicating the situation.

On the other hand, China was an economic "basket case."  Taiwan, the tiny island of refuge for Chinese nationalism, Chang Kai Shek, was the 7th largest economy in the world while the giant PRC was 16th.  If the standard of living of the Chinese people continued in the harsh conditions of the middle of the 20th Century, the outlook for the  future of the Communist government there looked bleak, indeed.

The "new direction" mentioned before was to encourage trade with the PRC, piping vast sums of American dollars into that economy to foster its development.  At first this trade was fairly rational.  The Third World PRC needed all sorts of things that were manufactured in the U.S. and Europe.  Of course, still smarting from the centuries of humiliation during the opium wars, the industrious Chinese went right to work on producing the things they needed in their domestic industries.

In order to make the trade idea work, American consumers suddenly found that they had a new access to a large variety of appealing, imported Chinese goods.  Just as the Chinese had concentrated on becoming self-sufficient by producing what they needed, they energetically approached the prospect of producing what we needed with the same fervor.

During the opium importation, "free market" types from the West had enjoyed the resources to make the scheme happen.  They had ships, armies and a colonial India to produce the opium.  They apparently were also immune from any troubling self-observation over the consequences of their ambitions.

During the outset of the new trade policies with China, a similar group of "free marketeers" emerged, again, in the West.  Here we can focus on the particular Capitalists of the U.S. trading economy.  These businessmen knew that diverting part of this country's  manufacturing capacity from domestic U.S. goods to imported Chinese goods would, in a certain sense, cut directly into the "cash flow" which our own country was enjoying.  Cheaper imported products would gradually overwhelm their domestic competitors.  Jobs would be lost, wages would diminish and businesses would close.

For years after this trade policy was adopted, these were exactly the results.   However, during this time the U.S. economy was so strong that the material impact of these changes was essentially invisible.  The strong U.S. middle class continued to provide vast tax resources for the government.  Innovative U.S. companies took advantage of domestic technological superiority to create new business.  The degrading consequences on the U.S.'s deep wealth were almost imperceptible.

Just as more and more Chinese developed an appetite for the opium, more and more Americans developed an appetite for the products of China's cheap labor.  The  autocratic Chinese government was able to manipulate the economy there to maximize the opportunities to import these, because of the labor costs, highly competitive products.  The U.S. "free marketeers" became frenzied economic "eager beavers" with an unquenchable appetite for the profits they could derive from the venture.

Little thought was given to the scope of the transfer of wealth.  In any event, no matter what happened, American policy makers were satisfied that this drain on the fundamental U.S. economy was desirable compared to the costs of  creating another Cold War adversary.  The crowd of growing oligarchs -- the eager "campaign contributors" to the same "policy makers" at election time -- were now making money hand over fist and encouraging their legislative pals to pass even more laws to support their scheme.

Predictably, over a period of a few decades, the standard of living of the average Chinese citizen improved substantially.  Not only was the country's economy enjoying the full benefit of the now terribly unbalanced trade policy, the dictatorial side of the Communist government was able to very efficiently (compared to a "free market," democratic America) direct this influx of capital to the construction of a modern state with both a convincing system of control of its people and all the trappings of a fairly effective, modern military.

There would be no more concessions of Provinces to colonial occupiers.

As to the artificially competitive Chinese goods, it turns out that they were quite similar to the opium.  Everybody liked them.  Yes, the market "quaked" a couple of times thanks to the questionable quality of many Chinese items compared to the American products they replaced, but the low prices for consumers and the incredible profit margins for the "free marketeers" always won out in the end.

Between the well lubricated legislative cover, primarily Senate Republicans, of course, and the increasingly stressed pocket books of Americans struggling through a very well engineered national economic collapse, the enterprise developed a certain "heavenly" quality.   It produced not only a startling "balance of trade" catastrophe, but also a robust collection of American billionaires, plutocrats who were enthusiastically willing to sacrifice the economic future of the country for even more of their new wealth.

In fact, the richer the opportunistic "free marketeers" became, the more dependably they could exercise their influence in the legislation.  When the office of the President turned out to have a convenient "price tag" during the autocracy, it became a screaming game of "anything goes."

That's precisely where it is now.


Although it may appear that the balance of trade is improving toward the right hand side of the graph, that reduction is actually the product of the economic collapse in the U.S.  Americans, most likely, continue to have roughly the same appetite for China's low cost labor goods, except now, they can't even afford these low priced items.  The balance of trade is temporarily improving because Americans aren't buying anything from anybody -- imported or domestic.

Not only were the low labor rates of the Chinese an appealing addiction to Americans, the case became even more grave thanks to another Chinese cultural habit.  Chinese workers traditionally saved their money.  In the pre-middle class environment of the 1970's, there were few consumer goods in China to absorb  the "capital power" entrained in all these savings accounts.  Cash rich, the Communists found that they could loan this wealth to the Americans to purchase  not only more Chinese domestic products but anything else which needed to be bought on credit, things such as the recent oil wars.

Predictably, they found that they could, in fact, loan this money to a reckless autocrat who wanted an expensive war for the Iraqi Hydrocarbon Treaty, an unpaid mutlti-trillion dollar tax cut for the plutocrats mentioned before and an outrageously, also unpaid, "bread and circuses" Medicaire Prescription Bill that was sure to win yet another election before the economy collapsed.

However, when the cash service of these debts was added to the now serious degradation of the economic fundamentals, the American economy staggered.  Either the "free marketeers" had underestimated the rate at which the disaster would approach or they simply didn't care.  Their initial plan seems to have been clear enough.  Extract all the remaining equity from the American economic system before it collapsed, convert the "take" to gold before the dollar's "currency value" slid much further and move to Paraguay.

However, this ambitious time line hit a snag.  This scheduling error caused a momentary pause for our new masters, but nothing serious.  

Some of the even less scrupulous among this crowd of billionaires decided  -- at close to the last minute -- that they would simply prefer to take control of the U.S., reducing the remnant of the traditional middle class to a modern version of "wage slaves," labor paid at wages which now had to compete with their Chinese counterparts. They were banking on the idea that once the economy faltered, most American consumers would not be able to comfortably countenance the prospect of quietly accepting lowered standards of living, and the resulting distress could be easily capitalized into a further political advantage.

This produced the hordes of illiterate hill billies chanting something incomprehensible about "take our country back."  Of course, the Chinese, aside from holding vast sums of the autocrat's debt, were not the villians.  American plutocrats, emboldened by the amount of influence their riches could  now purchase in the government, had -- in a very tangible way -- taken control of everything of value in the U.S.

However, once the engines of American prosperity had been replaced "whole cloth" by their Chinese competitors, further reductions in income amid carefully crafted increases in costs of living -- very profitable ones for the new plutocrats -- marked the permanent demise of what had been the promise of the pre-1970's economy.

Part Three of this series will discuss some possible options we, as a nation, may still enjoy, although probably not "taking our country back." Please join MeanMesa for the final part of the posting!

Please stay tuned for Part Three!

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